The rise of tax credits: How Arizona created an alternative to school vouchers — and why they’re spreading

With its recent adoptionof a tax credit scholarship program, Illinois became the 18th state to adopt an innocuously named — but highly controversial — policy that critics have described as a “backdoor voucher.”

In some sense, the description is apt. But by injecting a middle layer into the government’s support of private school tuition, tax credits help avoid some of the legal and political obstacles that have dogged efforts by advocates, like Education Secretary Betsy DeVos, to promote school choice through vouchers.

Perhaps as a result, more students now use tax incentive programs than vouchers to attend private schools in the U.S. A federal tax credit is also seen as the Trump administration’s favored approach for promoting school choice at the federal level, though its immediate progress looks increasingly unlikely.

The 20-year history of this approach offers insights into why it has taken hold: resistance to legal challenge; limited government oversight, appealing to among free-market advocates of school choice; and a more politically palatable branding than vouchers.

“This is far better than vouchers — it is easier to pass and easier to uphold,” Trent Franks, a conservative activist and now a U.S. congressman, said in 1999 after Arizona’s state supreme court upheld its tuition tax credit program. “I think this is the direction the country will go in.”

He proved largely right.

The number of students participating in private school choice programs over time, including tax credits (green) and vouchers (orange). (EdChoice)

Arizona’s pioneering approach

The first tax credit program was passed in Arizona in 1997. Arizona’s constitution, like most other states’, bars public dollars from going to religiously affiliated schools. Proponents knew any plan to promote private school choice would likely end up in court.

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So they landed upon an ingenious approach that would make the initiative more likely to survive legal challenge. Instead of issuing vouchers for private school tuition — like Milwaukee had done since 1990 — the state would outsource that role to nonprofits. Those groups would get their money from donations, encouraged by generous tax credits.

It worked like this: An individual could donate up to $500 to a nonprofit, then get a tax cut for the exact amount they donated. The nonprofit would take the donated money and use it to offer tuition stipends — essentially vouchers — to families who met certain conditions. That system allows the state to promote the tuition subsidy, losing $500 in revenue for each maxed out donation, without paying for it directly.

Arizona’s program has since grown, and the state has created a number of other tax credit programs. (This approach is distinct from programs that give individual families tax breaks for educational spending on their own children; Illinois has had such an initiative since 2000, while Minnesota has had one since 1955.)

Arizona’s and Milwaukee’s policies look similar. In both places, students can receive a subsidy to attend a private school, and it comes at the expense of state revenue. But crucially, in Arizona, the government never had the money to begin with.

“The point was in part to ensure that these were not government-run programs,” Lisa Graham Keegan, who was Arizona’s school superintendent when the tax credit program passed, told Chalkbeat. “Those scholarships are completely separate, both for legal reasons and for philosophical reasons.”

Tax credits: the legal survivors

Private school choice across the country have been inundated with legal challenges, but tax credits have proven remarkably resilient.

Although voucher programs have continued to grow and were upheld by the U.S. Supreme Court in 2002, they have also faced legal challenges in state courts. Colorado’s top court, for example, struck down a voucher program in 2015. (The case is currently being reconsidered in light of a recent Supreme Court decision.)

Tax credits “grew up as a result of saying we need a different vehicle than vouchers in states that have legal issues,” said Robert Enlow, the president of EdChoice, an Indianapolis-based group that backs both vouchers and tax credits. (EdChoice is a funder of Chalkbeat.)

Often, cases have been thrown out before substantive arguments can be made, amounting to a win for the programs: Some courts have ruled that private organizations or individuals do not have legal standing to challenge tax credits, since they aren’t government expenditures.

“When Arizona taxpayers choose to contribute to [scholarship organizations], they spend their own money, not money the State has collected,” Justice Anthony Kennedy wrote.

Light regulatory touch proves a blessing and a downside

To Arizona conservatives skeptical of both regulation and the education establishment, the system had an additional benefit.

“The point was in part to ensure that these were not government-run programs,” said Graham Keegan, and additionally that “these don’t become government dollars.”

Nationwide, tax credit scholarship programs appear less regulated than voucher programs, some of which require private school students to take state tests or for schools to undergo financial audits.

Free-market oriented supporters “see ‘neovouchers’ as much less likely to be regulated and have restrictions — the government strings attached — than a traditional voucher law,” said Kevin Welner, a University of Colorado professor who wrote a book on the rise of tax credit programs and is generally critical of them.

A 1998 essay published by the Mackinac Center, a conservative Michigan think tank, made this case explicitly: “Tuition tax credits also create very different effects than vouchers. … Vouchers are more likely to be viewed as a rationale for regulating the entity that receives the subsidy.”

This has played out in practice. One analysis compared several voucher programs to a number of tax credit programs and found that, in almost all cases, vouchers were more regulated. Most tax credit systems had few, if any, financial reporting or disclosure requirements. (Notably, Florida’s program, the largest in the country, was the most regulated tax credit initiative.)

Many tax credit programs do not require participating students to take state exams, and if they do, the tests are rarely comparable to the assessments taken in public school. This means that while voucher programs have been widely studied, there is little research on the effect of receiving a tax credit scholarship.

Supporters of this approach argue that such requirements discourage private schools from participating.

Limited oversight, however, has proven something of a political liability, insofar as it has allowed for financial malfeasance. National media have drawn attention to how one prominent politician and advocate for Arizona’s program was also able to profit personally from it, for example.

“I think [limited regulation] is a feature that has some bugs,” said Enlow of EdChoice. “We need to have transparency. The programs, like Florida, which are very transparent and very open to data collection, I think are very important.” He declined to name any tax credit programs that, in his view, lacked sufficient transparency.

The use of the tax code has also raised another concern: Under some tax credit systems, “donors” can actually earn a profit by taking advantage of both state and federal tax breaks.

Selling tax credits

How exactly to brand tax credit programs has been the subject of fierce debates. Opponents have called them “neovouchers” and “voucher schemes,” while supporters sometimes portray them as entirely distinct from vouchers.

Tax credits tend to poll better than vouchers, and Welner thinks that may be because it’s less clear to most people what they are.

“People’s eyes get bleary and they tune out when people start talking about tax credits,” he said. “That helps to avoid a situation where they respond to it the same way they respond to a voucher proposal.”

Tax credits are essentially a tax cut, which can be a selling point for some, especially conservatives. Advocates sometimes also downplay the costs of tax credits to the government.

“Is it foregone revenue? Sure, but it doesn’t mean it’s the state’s revenue,” said Enlow.

The distinctions between vouchers and tax credits, though, may ultimately matter less to lawmakers in states where they are being debated. In Illinois, critics connected tax credits to vouchers, and Democrats were largely opposed to the tax credit initiative that ultimately passed.

“In my experience the arguments have been the same whether it’s a tax credit bill or a voucher bill when you’re talking with legislators,” Enlow said. “There’s some nuances, but it’s still the same.”

Correction: An earlier version of this piece misstated the name of a free-market Michigan think tank, which is the Mackinac Center.

In a split vote, the Denver school board last week approved three more middle schools — but none will open right away.

Though they are modeled after successful existing schools, and though district officials feel an urgency to improve school quality districtwide, the three will wait with more than 20 others until a school building becomes available.

That could happen if the district closes a struggling school or builds a brand new one. But slowing enrollment growth means it will likely not build many schools in the coming years.

The number of approved schools on hold until they find a campus has grown over the years, even as the school board adopted a policy in 2015 that calls for replacing chronically low-performing schools with new ones deemed more likely to succeed.

The makeup of Denver’s school board has changed, and not all of the new members believe closing struggling schools is good for students. In voting on the three new middle schools, three of the seven board members expressed concerns about the concept of keeping approved schools “on the shelf” because it presupposes existing schools will be shuttered.

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Olson and Bacon voiced the strongest reservations about approving the three schools, temporarily called Beacon Network Middle Schools 3, 4, and 5. The schools would be run by the same administrators who oversee Kepner Beacon and Grant Beacon middle schools.

Kepner Beacon and Grant Beacon are “innovation schools,” which means they have more financial and programmatic freedom than traditional district-run schools but not as much independence as charter schools. The two schools focus on personalized learning, partly by giving students access to technology that allows them to learn at their own pace. Each is rated “green,” the second-highest rating on Denver Public Schools’ color-coded scale.

Olson and Bacon said they don’t doubt additional Beacon schools would serve students well. Rather, Bacon said, she’s concerned about having too many of the same type of school and about the length of time schools should be allowed to wait before opening. Being approved by the school board doesn’t guarantee that a school will open.

In the end, the three Beacon schools were approved to open in the fall of 2019 or thereafter. Olson voted no on all three. Bacon voted no on two of them and yes on the third.

Board president Anne Rowe, vice president Barbara O’Brien, and members Lisa Flores and Happy Haynes voted yes on all three. Angela Cobián, who was elected last fall along with Olson and Bacon, voted yes on two schools and abstained from voting on the third.

Cobián said her votes were meant to reflect that she supports the Beacon schools but shares her fellow board members’ concerns. She said she’s committed to making sure the district supports existing schools so they don’t get to the point of closure or replacement.

There are at least 24 schools already waiting for a campus in Denver. Nineteen of them were proposed by four homegrown, high-performing charter school networks. The district’s largest charter school network, DSST, has eight middle and high schools waiting to open.

District officials said they plan to spend time over the summer thinking through these concerns.

Jennifer Holladay, who leads the department that oversees charter and innovation schools, said staff will develop recommendations for how long schools should be allowed to sit on the shelf and whether the district should continue to accept “batch applications” for more than one school at a time, which has been common practice among the homegrown networks.

Disputes with Tennessee testmakers aren’t new. Here’s an update on the state’s lawsuit with Measurement Inc.

The testing company fired by Tennessee’s education department two years ago may have to wait until 2019 to settle the case, according to documents recently obtained by Chalkbeat.

As the future of the state’s current testing company, Questar, remains uncertain after a series of testing snafus this year, Tennessee continues to build a case against the first company it hired to usher in online testing three years ago.

The $25.3 million lawsuit, filed by Measurement Inc. of North Carolina, says the state owes about a quarter of the company’s five-year, $108 million contract, which Tennessee officials canceled after technical problems roiled the test’s 2016 rollout. So far, the state has paid the company $545,000.

The 2016 test was meant to showcase TNReady, the state’s new, rigorous, online testing program. But the online exam crashed, and the state abandoned it, asking Measurement Inc. to pivot to paper tests. After numerous delays in delivering the paper tests, Education Commissioner Candice McQueen fired the company.

Measurement Inc. filed a lawsuit last June, and the state Department of Education responded in January with a counterclaim saying the company did not fulfill its duties. Now, the state and the company have through spring 2019 to build their cases and call witnesses. (You can view Measurement Inc.’s claims, and the state’s counterclaim below).

The company argues that the state’s decision to cancel online testing and switch to paper was a series of “unrealistic, arbitrary, and changing demands,” and therefore, the state shares blame for the canceled test.

But the state department countered in its January response that Measurement Inc. breached its contract and didn’t communicate truthfully about the status of the online exam.

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After Measurement Inc., Tennessee entered into a two-year contract with Minnesota-based Questar to revive the TNReady online exam. In 2017, the state opted to only use paper exams, and testing went smoothly for the most part, outside of delays in returning test results.

But things didn’t go well this spring, when Tennessee tried to return to online testing under Questar. The reasons for the complications are numerous — but different from issues that ruined the online test’s 2016 debut.

Although Tennessee completed its online testing this spring, it was beset with technological glitches, a reported cyber attack on the testing system, and poor internet connectivity. Many districts are not planning to use the scores in student grading, and teachers can opt out of using the scores in their evaluations.

The state is negotiating with Questar about its $30 million-a-year contract and also is asking Questar’s parent company, Educational Testing Services, to take on the design work of TNReady. McQueen did not offer specifics about either, but any changes must be approved by the legislature’s fiscal review committee.

Questar’s two-year contract ends Nov. 30, and the state either will stick with the company or find its third testing vendor in four years.

You can view Measurement Inc.’s claims, and the state’s counterclaim, in full below: